Guidelines in the Tax Treatment of Separation Benefits Received by Officials and Employees on Account of Their Separation from Employment Due to Death, Sickness or Other Physical Disability and the Issuance of Certificate of Tax Exemption from Income Tax and from the Withholding Tax

June 13, 2011 REVENUE MEMORANDUM ORDER NO. 026-11 SUBJECT : Guidelines in the Tax Treatment of Separation Benefits Received by Officials and Employees on Account of Their Separation from Employment Due to Death, Sickness or Other Physical Disability and the Issuance of Certificate of Tax Exemption from Income Tax and from the Withholding Tax TO : All Internal Revenue Officials and Others Concerned I. Background Pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, as amended, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee shall be excluded from the gross income and shall be exempt from income tax regardless of age or length of service. caIDSH Section 32 (B) (6) (b) requires the presence of two (2) conditions in order that the employee benefits may be granted tax exemption, namely (1) the official or employee is separated from the service of the employer due to death, sickness or other physical disability, or for any cause beyond the control of the said official or employee; and (2) the official or employee or his heirs receives any amount from the employer on account of such separation. It has come to the attention of this Office that requests for rulings of this nature are usually secured by employees of private entities who are separated from employment. The employee submits to his employer the issued ruling to prove that his separation benefits are exempt from income tax and that no withholding taxes should be deducted therefrom. Without a ruling, the employer deducts withholding taxes and remits the same to the BIR to avoid the possibility of being assessed. To the detriment of the employee, the recovery of the withheld taxes can only be made through tax refund. Thus, this Order is being issued to devolve to the Revenue Regions the processing of requests for rulings confirming that the amounts received by employee or by his heirs from the employer because of death, sickness or other physical disability are tax exempt. Provided, however, that instead of a confirmatory ruling, a Certificate of Tax Exemption shall be issued by the Regional Director. Provided, further, that the processing of requests for rulings providing that amounts received by an official or employee from his employer for any other causes beyond the control of the said official or employee are tax exempt, shall continue to be processed at the Law Division in the National Office. II. Documentary Requirements In order to facilitate the processing of requests for tax exemption of separation benefits received by officials/employees or his/her heirs as a result of their separation from employment due to death, sickness or other physical disability, regardless of age and length of service, the following documents are required to be submitted to the Revenue District Office (RDO) where the employer is originally registered, to support such request: 1) Letter request from the Official/Employee (or by his heirs) or the Employer for the exemption of separation benefits from income tax and withholding tax; 2) Death Certified true copy of Death Certificate; 3) Sickness/Physical Disability a) Sworn Affidavits to be executed by the employer's physician or the employee's attending physician and the Head of Office/Entity or his representative, attesting to the fact that the retiring/separated official or employee is suffering from a serious illness or physical disability that affects the performance of his duties and endangers his life, if he continues working; TIHDAa b) Clinical Record of the official/employee concerned indicating the history of illness/physical disability and initial diagnosis; and c) Laboratory examination confirming the illness suffered by such official/employee or medical certificate confirming the physical disability of the official/employee. The Bureau shall not be precluded from requiring additional documents to prove entitlement to tax exemption under the prevailing circumstances. A Checklist of Requirements which will be provided to the requesting Official/Employee or Employer is hereby attached as Annex "A". III. Processing of Request for Issuance of Certificate of Tax Exemption of Separation Benefits Received as a Result of Separation from Employment Due to Death, Sickness or Other Physical Disability of the Employee A) Application and Pre-Evaluation by the Revenue District Office 1) The requesting Official/Employee (or by his heirs) who was separated from employment due to death, sickness or other physical disability, regardless of age and length of service, or requesting Employer, shall be required to submit all the documentary requirements for the processing of the Certificate of Exemption with the RDO where the Employer is originally registered. 2) The Officer of the Day in the concerned RDO shall pre-evaluate the application if it satisfactorily complies with the herein prescribed guidelines using the Action Sheet-Checklist of Requirements (Annex "B") . a) If found complete, he shall then forward the application together with the pertinent supporting documents to the Revenue District Officer who, in turn, shall thoroughly evaluate the same. Otherwise, a Notice to Comply (Annex "C") shall be issued to the requesting Official/Employee/Heirs or Employer. b) If after the lapse of the period given in the Notice to Comply, the applicant has not submitted the documents required, a Notice of Archiving (Annex "D") shall be issued. 3) The Revenue District Officer will now prepare an endorsement letter addressed to the Chief, Legal Division of the Revenue Region having jurisdiction over the RDO. The said pro-forma endorsement is attached hereto as Annex "E". ETHSAI 4) The Revenue District Officer, within five (5) days from receipt of the application, shall then transmit the complete set of documentary requirements to the Legal Division for evaluation proper and preparation of appropriate action. B) Evaluation and Preparation of Certificates of Tax Exemption by Legal Division 1) Upon receipt by the Legal Division Chief of the Regional Office of the requests/applications for tax exemption, he shall assign the same to an action officer for evaluation and drafting of the appropriate action. 2) The Certificate of Tax Exemption to be issued shall contain the applicable tax exemptions to which the requesting Official/Employee/Heirs is entitled to, hereto attached as Annex "F". C) Review, Approval of Tax Exemptions and Issuance of Certificates by the Regional Director 1) The applications for tax exemption shall be re-evaluated and approved by the Regional Director. 2) Only applications for tax exemption which strictly comply with the legal and documentary requirements prescribed herein shall be approved by the Regional Director. D) Numbering and Releasing of Tax Certificates or Tax Rulings 1) Immediately after the Certificate of Tax Exemption has been approved and signed by the Regional Director, the same shall be numbered in the upper right portion of the Certificate of Tax Exemption. 2) The Certificate of Tax Exemption shall adopt the following numbering code: "BIR CTE No. RR 01-RDO 001-10-00001 " where a) RR 01 stands for the issuing Revenue Region; b) RDO 001 refers to the RDO No. where the employer is registered; c) 10 represents the calendar year 2010; and d) 00001 indicates that this is the first Certificate of Tax Exemption issued for the year in the Regional Office concerned. 3) The Certificates of Tax Exemption shall be numbered sequentially as they are issued. 4) The Legal Division of the Revenue Region shall prepare the Certificate of Tax Exemption in three (3) copies to be issued and distributed as follows: Original taxpayer's copy Duplicate copy to be attached to the docket Triplicate copy to the ACIR, Legal Service a) The Legal Division must ensure that the original copy of the signed Certificates of Tax Exemption bear the official dry seal of the Bureau before the release to taxpayers to avoid invalidation of the same. b) The Legal Division shall maintain a permanent record book where the Certificate of Tax Exemption Number, Applicant/Requesting Taxpayer, and the Date of Issue shall be sequentially written. IV. Tax Exemptions and Incentives of Separation Benefits The separation benefits received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability, regardless of age and length of service, shall have the following tax implications: DIECTc 1) Income Tax The separation benefits shall not be included in gross income of the employee and shall be exempt from taxation pursuant to Section 32(B)(6)(b) of the 1997 Tax Code, as amended. However, other income received prior to separation shall be subject to tax pursuant to Section 24 of the same Code. 2) Withholding Tax The separation benefits shall be exempt from withholding tax as prescribed by Section 79 of the 1997 Tax Code, as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations Nos. 6-2001 and 12-2001. Accordingly, no withholding taxes shall be deducted from the separation benefits and the entire amount thereof shall be given to the entitled separated employee. V. Transitory Provision All applications for tax exemption filed and are still pending with the Law Division in the National Office prior to the issuance of this RMO shall be acted upon therein accordingly. VI. Repealing Clause All other issuances and/or portions thereof that are inconsistent herewith are hereby repealed accordingly. VII. Effectivity This Order shall take effect immediately. (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue ANNEX A Quezon City Checklist of Requirements (For Tax Exemption Application of Separation Benefits Under Section 32 (B) (6) (b) of the NIRC, as Amended Due to Death, Sickness/Physical Disability) [ / ] Submitted [ X ] Not Submitted [N/A] Applicable Document Remarks 1. Application letter stating the factual and legal basis for tax exemption _______ ____________________ 2. Certified true copy of Death Certificate, if separation was due to death of employee _______ ____________________ 3. If separation was due to sickness/ physical disability: a) Sworn Affidavits to be executed by the employer's physician and the Head of Office/Entity, attesting to the fact that the retiring/separated official or employee is suffering from a serious illness or physical disability that affects the performance of his duties and endangers his life, if he continues working _______ ____________________ b) Clinical Record of the official/ employee concerned indicating the history of illness/physical disability and initial diagnosis _______ ____________________ c) Laboratory examination confirming the illness suffered by such official/employee or medical certificate confirming the physical disability of the official/employee _______ ____________________ Other documents submitted: ____________________________________________________________________ ____________________________________________________________________ Instruction : Please complete and submit the foregoing documentary requirements to the Revenue District Office (RDO) having jurisdiction over the principal place of business of the employer for processing of the tax exemption confirmation. ANNEX B RDO Control No.: __________ Date: ____________________ Action Sheet (For Tax Exemption Application of Separation Benefits Under Section 32 (B) (6) (b) of the NIRC, as Amended Due to Death, Sickness/Physical Disability) NAME OF TAXPAYER: _____________________________________________________________ [ / ] Submitted [ X ] Not Submitted [N/A] Applicable Document Remarks 1. Application letter stating the factual and legal basis for tax exemption _______ ____________________ 2. Certified true copy of Death Certificate, if separation was due to death of employee _______ ____________________ 3. If separation was due to sickness/ physical disability: a) Sworn Affidavits to be executed by the employer's physician and the Head of Office/Entity, attesting to the fact that the retiring/separated official or employee is suffering from a serious illness or physical disability that affects the performance of his duties and endangers his life, if he continues working _______ ____________________ b) Clinical Record of the official/ employee concerned indicating the history of illness/physical disability and initial diagnosis _______ ____________________ c) Laboratory examination confirming the illness suffered by such official/employee or medical certificate confirming the physical disability of the official/employee _______ ____________________ Other documents submitted: ____________________________________________________________________ ____________________________________________________________________ Evaluated by: ____________________ ANNEX C NOTICE TO COMPLY [DATE] [NAME OF REQUESTING OFFICIAL/EMPLOYEE/HEIR] OR [NAME OF REQUESTING EMPLOYER] [ Address ] Attention: [Name of Signatory to Application] Gentlemen/Ladies: This is to acknowledge receipt of [your letter dated (___________), or on behalf of your official or employee, (name of official or employee) whichever is applicable], requesting for the issuance of [Certificate of Tax Exemption or a Ruling on the exemption, whichever is applicable] of under Section 32 (B) (6) (b) of the NIRC of 1997, as amended and RMO _______. EHSADc To facilitate the processing of the above application, please submit the following documents: 1. [LIST OF MISSING DOCUMENTS] Should you fail to submit the aforementioned documents [on or before a defined date], we shall consider to archive your request letter, without prejudice to your filing of a new request. Very truly yours, [Name of Signatory] Revenue District Officer RDO ____ or Chief, Law Division OFFICE CODE ANNEX D NOTICE OF ARCHIVING [ Date ] [NAME OF REQUESTING OFFICIAL/EMPLOYEE/HEIR] OR [NAME OF REQUESTING EMPLOYER] [ Address ] Attention: [Name of Signatory to Application] Gentlemen/Ladies: In our letter dated [date of notice to comply requirements], you were given until [date of deadline to taxpayer] to comply with the submission of documents in order for your application to be processed. However, to date we have not received all the documents necessary for the processing of your application. In view thereof, we have already closed your file without prejudice to your filing of a new request for ruling complete with all the necessary documents. At any time when documentary requirements are completed, you may re-file the request letter reckoned from the date of original filing. Kindly submit a photocopy of the earlier archived request letter together with all the necessary documents and we shall be glad to assist you. Very truly yours, [Name of Signatory] Revenue District Officer RDO ___ or Chief, Law Division OFFICE CODE ANNEX E Revenue District Office No. ____ Revenue Region. ____ 1st Endorsement (Date) Respectfully forwarded to Regional Director (Name of Director) , Revenue Region No. (RR number) , (Municipality/City) , the hereto attached application for tax exemption of (Name of Requesting Official/Employee) employed with (Name of Employer) with principal office address at (Complete address) , bearing the herein recommendation for the issuance of the corresponding Certificate of Tax Exemption to the requesting official/employee which has satisfactorily complied with the legal as well as documentary requirements prescribed under RMO ______, for appropriate action. ________________________ Revenue District Officer ANNEX F REVENUE REGION No. _________ BIR CTE No. RR 01-RDO 001-10-00001 CERTIFICATE OF TAX EXEMPTION issued to (NAME OF OFFICIAL/EMPLOYEE) Registered Address Taxpayer Identification Number This certifies that the above-named taxpayer, employed with (Name of Employer) with principal office address at (Complete address) , has proven to have been separated from the service of the employer because of (death, sickness or other physical disability of the said official or employee) , hence, the amount received by the above-named taxpayer or by his heirs from the employer as a consequence of separation from the service of the employer regardless of age or length of service, shall be excluded from his gross income and shall be exempt from taxation pursuant to Section 32 (B) (6) (b) of the 1997 Tax Code, as amended. Likewise, the separation benefits shall be exempted from withholding tax as prescribed by Section 79 of the 1997 Tax Code, as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations Nos. 6-2001 and 12-2001. TSEAaD This certification shall continue to be valid unless revoked by this Office for violation of any provisions of RMO ______ and other applicable rules and regulations of BIR, and the terms and conditions herein set forth. This Certificate of Tax Exemption is being issued on the basis of the facts and documents as represented and submitted. However, if upon investigation, the BIR ascertains that the facts are different, then this Certificate shall be considered null and void. Issued this _____ day of ____________, 20___. _______________________________ NAME OF REGIONAL DIRECTOR Regional Director Revenue Region No. _____